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First time investor? Here's why you should go for large cap stocks over small and mid caps

As a novice investor, placing your money in blue chip stocks are lower risk and fetch stable returns as these companies show lesser volatility in earnings and hence lesser volatility in stock prices.

twitter-logo Diksha Ramesh   New Delhi     Last Updated: May 30, 2017  | 17:11 IST
First time investor? Here's why you should go for large cap stocks over small and mid caps

Blue-chip stocks are nothing but large capital and financially sound companies that have well-established fundamentals and have been carrying out operations for many years now.

Typically, blue-chip stock has a market capitalisation running into billions. They generally feature among the top three companies in their sector.

You'd be surprised to know that they are even common household names!

As a novice investor, placing your money in blue chip stocks are lower risk and fetch stable returns as these companies show lesser volatility in earnings and hence lesser volatility in stock prices.

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The predictability of earnings from these companies is normally good and the management has a track record of performance and corporate governance practices.

Returns from these stocks are usually in line with performance of the stock market.   

According to Amarjeet Maurya, Senior Equity Research Analyst, Angel Broking, the stock market is already in a bull run and people are switching from small and mid cap stocks over to large cap stocks.

"Considering the markets are at an all-time high, as an investor I'll  take a lesser exposure in mid cap and instead go in for large cap stocks," he says.

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Besides the market rally, there is an underlying profit booking in the large cap space. This comes at a time when small and mid cap stocks have already given handsome returns and the limelight is slowly moving onto large cap stocks.

Amarjeet also says that there has been a correction in the gap between mid and large cap stocks.

In the last two years, small and mid caps have reported strong returns creating wealth for investors but have posted weak earnings reports and dip valuations.

"I feel mid caps have a higher risk as they are unable to generate strong earnings," says Amarjeet.

However, large cap stocks have outperformed mid caps through improved valuations and are here to stay.

Deepak Jasani, Head - Retail Research, HDFC securities adds that chances of a negative surprise is far less in the large cap stocks and losses in holding value are rare too.

Large cap stocks have stronger business models and have established a higher year-on-year growth. They also boast a larger base and stability.

However, it is important to keep in mind that because large cap stocks have a larger base, their returns are not as high as small and mid cap stocks.

Further, there is a direct relationship between the economy and large cap stocks. In an event of a downturn, small and mid cap stock are manage but dents are felt in large cap stocks.

According to Angel Broking, Larsen & Toubro, Asian Paints, Reliance Industries Ltd and Maruti Suzuki Ltd are some of the top performing blue-chip stocks.

Even the stock of ITC has gained momentum over favourable GST rates and is a good option for maiden investors.

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Below are charts that show the comparative returns between the three indices over 1 year and 5 years:

 

But whether large cap stocks are ready to hog the limelight, now that small and mid cap stocks are delivered good returns is based on how good an investor you are.

"The more evolved an investor becomes, the higher the proportion of small and midcap stocks he can hold in his portfolio," says Deepak.

Therefore, first-time investors are better off sticking to large cap stocks prior to understanding the market fundamentals.

 

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